Ebook: financial inclusion (English)

BANKING PENETRATION, AN INSTRUMENT TO PROMOTE DEVELOPMENT

Financial

Inclusion 01 02 03

Towards full banking penetration?

The gaps of banking penetration INFOGRAFร A Financial inclusion 2011/2014

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04 05

INTERVIEW Gema Sacristรกn Banking penetration in Africa driven by mobile devices

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01 Towards full banking penetration?

Between 2011 and 2014, 700 million people opened a bank account. The number of people outside the banking system fell by 20% worldwide.

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Between 2011 and 2014, 700 million people opened a bank account. In the same period, the number of people outside the banking system fell by 20%, or 2 billion adults. In 2014, 62% of adults held an account, well above the 54% registered in 2011.

The World Bank's 2014 Global Findex study, funded by the Bill and Melinda Gates Foundation in partnership with Gallup, Inc., highlights the importance of banking penetration for a country's development: “It is a critical factor in reducing poverty and is the result of economic growth. It is not an end in itself, but it leads us towards an end since it offers substantial benefits for individuals.”

The year 2020 is one of the dates set by the World Bank for many countries in Latin America to achieve full banking penetration. Meanwhile, governments are implementing programs to put an end to the so-called “financial illiteracy” of the population. This report stresses that to the extent that “people participate in the financial system, they are better prepared to run their businesses,

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invest in education or face risks”. financiero está más capacitada para desarrollar sus negocios, invertir en educación o enfrentarse a los riesgos”.

Pedro Ramiro, coordinator of the Latin American Multinational Company Observatory (OMAL), points out in this article published in El País the possibilities that banking penetration offers to financial institutions: “Workers are paid in an envelope, families do not use standing orders, or mortgages… there is a huge potentiality for customers.”

Turning to the report, Global Findex shows that Latin America and the Caribbean have made significant progress in banking penetration. 51% of adults (over the age of 15) in Latin America and the Caribbean hold an account, compared with 39% in 2011, but even though this progress is significant, there are still 210 million adults outside the banking system. These account for 10% of the total 2 billion people who are still not using financial services worldwide.

Today, 40 million adults receive government payments in accounts. In Brazil, 88% of the beneficiaries of government transfers received them in an account. In Argentina, the number of account holders among the poorest 40% of households doubled to 44% between 2011 and 2014.

Central America the number of account holders increased by more than

50

%

In Mexico, the percentage of the adult population with an account increased from 27.4% in 2011 to 31.1% in 2014, a level well below countries like Brazil (68.1% of adults with an account), Chile (63.3%), Venezuela (57%), Ecuador (46.2%), Uruguay (45.6%), Panama (43.7%), Bolivia (41.8%) and Guatemala (41.3%).

The most notable change in access to financial services in the region comes from Central America: in El Salvador, Guatemala, Panama and Honduras the number of account holders increased by more than 50% between 2011 and 2014. Lagging behind are Peru (with only 29% of adults with an account), Nicaragua (19%) and Haiti (18%).

In the region as a whole, 28% of adults make payments directly against their accounts using a debit card, compared with 14% in developing countries on average.

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The role of governments and private institutions in banking penetration These figures show that there is still a long way to go in promoting the use of banking: 135 million adults hold an account, but they pay for their utility bills in cash. The report says: “By paying wages in the public sector and government wages and transfers in digital format (instead of in cash), governments and the private sector can play a key role in accelerating the opening of accounts and boosting financial inclusion. Worldwide, payment of government wages and transfers through accounts could increase to 160 million the number of adults holding an account.”

The report also addresses another important part of banking penetration: saving.

However, holding a checking account does not guarantee that people will save money at a financial institution.

Of the 41% of people who claimed to have saved in 2014, more than half did not to so through financial and similar institutions, although compared with 2011 there was a 13% increase in those who saved using bank branches.

When asked why they do not hold an account, their answer is that they are very expensive and they believe that they have no need to hold an

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account. The report highlights that the moment “costs go down, many people will be willing to hold an account”.

Full banking penetration is one of the most effective instruments in fighting poverty.

02 The gaps of banking penetration More than one billion women have no access to the financial system ( ) ; 58% are bank account holders compared with 65% of men.

More than one billion women --40% of women worldwide-- have no access to the financial system.

According to the Global Findex 2014 report, the gender gap is obvious: 58% are bank account holders compared with 65% of men.

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This represents an 11% increase for both sexes if we take the initial 2011 survey as a reference, although the inequality between men and women stands at 7% (globally) and increases to 9% in developing economies. In Southeast Asia only 35% of women have access to an account, while the percentage for men increases to 55%.

The gap is particularly significant in the Middle East, where women are half as likely to hold an account compared with men.

In Latin America, inequality has decreased and tends to level off: 47% of women hold an account, compared with 54% of men.

% 40 of women worldwide, have no access to the financial system

% 58 of wome are bank account holders compared with 65% of men

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Poor women bear the brunt: because of their low income they are still being denied access to financial tools. As pointed out in this article by Sri Mulyani Indrawati, Managing Director and Chief Operating Officer of the World Bank: “Women in particular are in a situation of disadvantage as regards access to financial services. In developing economies they are 20% less likely than men to hold a bank account and 17% less likely to apply formally for a loan.

Moreover, they have less access to secure saving mechanisms and are more likely to use informal, and therefore, probably riskier and more expensive methods.”

According to Ursula Heimann, managing partner of Solliv: “Women usually manage their money in the short term better than men, but they have less financial expertise and confidence in their abilities, which leads to less access to formal financial products”.

And what happens when a woman applies for a loan? This report by Chile's Bank and Financial Institution Association (ABIF) points out that “women are better payers than men.

Despite facing a more complex financial situation at home, women make a relatively bigger effort to pay off their debts (...) and tend to assess in a more critical way the financial situation of their households, which leads to better financial planning and,

in turn, to better payment behavior”.

The benefits of giving women access to finance extends to their children and goes much further, since women spend money on health and education. In South Africa or Brazil, for example, granddaughters are more likely to enroll in school when the grandmothers receive a pension.

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A woman who has access to a bank account looks after her family and after herself and can change the future. This is illustrated by a Huffington Post article, Bank on Her: 5 Women

Prove Why They Belong in the Formal Financial System, that shows how access to the financial system changes the lives of women and of their families completely.

The obstacles Women face many barriers when it comes to having access to financial services and sometimes are not aware of the services available or are prevented from having access to them. In less developed economies, women cannot have access to banks because they live in remote areas and even on some occasions, as stated in this report by the World Bank, are regarded as second-class clients by financial institutions.

Another problem they face is that 200 million women, according to this study by GSMA, have no cell phones, which excludes them from all digital banking opportunities,.

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that very vigorous in countries with less banking penetration.

To achieve gender equity in access to financial products and services the institutions need to recognize the key aspects of the financial lives of women and their motivations.

As Sri Mulyani Indrawati concludes: “Financial inclusion matters not only because it promotes growth, but also because it helps to ensure that prosperity is widely shared.

Access to financial services plays a key role in the task of lifting people out of poverty, in empowering women and helping governments deliver services to the population. It is decisive in the fight against poverty.�

INFOGRAPHIC Financial inclusion

In 2011 the World Bank set up the Global Findex databases in order to study the financial transactions people use to save, ask for loans, make payments and manage risks.

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Growth of financial inclusion Between 2011 and 2014 there has been a significant growth in financial inclusi贸n worldwide.

51%

Adults in the world with a bank account

2011

Growth in developing countries

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62% 2014

Opportunities Gender In devoloping countries there is still a gender gap in terms of financial inclusion.

By age People aged between 15 and 24 are

Women

Men

Less likely to have an account.

Formal bank account

Less likely to have saved formally.

By residence With a formal account in low-income economies: Urban residence Rural residence

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Cellphone account While only 2% of adults around the world have their money account on their cellphone, 12% in sub-Saharan African countries have an account of this kind, and of this number, half have only this account.

Cash payments In developing countries over 400 million non-bankarized adults receive their wages or government support payments in cash.

Account uses Having an account is the first step towards financial inclusion. In developing countries, account holders use their accounts for a range of functions.

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Millions of adults with money account on their cellphones:

Agricultural payments in cash

04/INTERVIEW “Financial literacy plays a key role in responsible decision-making” – GEMA SACRISTÁN Gema Sacristán heads the Financial Markets Division at the Structured and Corporate Finance Department at the IDB, the area responsible for development and capital markets, financing foreign trade, and relations with financial intermediaries –mainly banks and mutual funds.

227 million adults in Latin America and the Caribbean do not have access to formal financial services How can we fight to achieve financial inclusion?

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We are currently seeing a redoubling of the efforts to increase access to financial services worldwide through a range of public and private initiatives and community

support schemes, such as opening accounts for depositing payroll checks or for transferring funds to the beneficiaries of public programs; financing guarantee systems for targeted loans; creating financial intermediaries; their funding and capitalization; subsidies for acquiring physical and technological infrastructure; providing technical assistance; and –in terms of the legal framework– the creation and adaptation of specific laws to regulate the activity of nonbanking financial intermediaries.

In addition large-scale financial services with a business focus are being provided by the banks (downscaling) and other companies and financial intermediaries.

What are the IDB's proposals?

Recent years have seen a number of public and private initiatives aimed at generating major changes in the financial systems of Latin America and

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the Caribbean (LAC). These include regulatory reforms for the supply of electronic money, increased coverage of physical access points by financial intermediaries, and the use of systems for making government payments.

The IDB works in several areas to improve financial inclusion in the region. Transactions and product knowledge focus on expanding the financing frontier for the productive sector, developing capital markets and risk management instruments, and implementing and reinforcing the rules and institutions for the effective management of macro-financial risks. The aim of our beyond Banking program is to promote practices of social and environmental sustainability and corporate governance among the financial intermediaries in the region.

What should the involvement of governments be?

In spite of the advances in recent years, the governments in the region need to reinforce

public policies aimed at increasing financial inclusion, and this requires more work in the areas of service supply and demand and in the institutional framework. For example, even in countries with greater regulatory advances, there is still a need for reforms to simplify the basic accounts and reduce the regulatory cost of accessing the system, to facilitate the expansion and financial viability of non-banking correspondents to lower transaction costs for users and providers, and to put in place sensible frameworks to back the regulations governing electronic money. This will ensure they are proportional to the risk assumed by the providers, and grant the necessary legal security while guaranteeing the financial stability of the system.

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And how should the private sector be involved?

Financial literacy plays a key role in responsible decisionmaking. It offers considerable benefits both for individuals and for the economy as a whole, as it helps develop the necessary skills to assess the risks and consider the potential gains of a financial transaction; in short, it teaches people how to weigh up the positive and negative

aspects of a financial alternative and reach a responsible decision.

Financial literacy also benefits individuals in all stages of their lives: children, by teaching them the value of money and

saving; young people, by preparing them to exercise responsible citizenship; adults, by helping them to plan crucial economic decisions throughout their lives such as buying a home or preparing for retirement. It also helps

families to adapt their savings and investment decisions to their risk profile and to their needs, which builds confidence and confers stability on the financial system. Equally, it promotes the development of new quality products and services, competition and financial innovation.

52

%

of Latin American Women still do not have a bank account

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What is the position of women in terms of financial inclusion in Latin America and the Caribbean?

The proportion of women in this area who have a bank account in a formal institution rose from 35% in 2011 to 48.5% in 2014, which narrows the gap with men from 9.3 points to 5.5 points.

In spite of these advances, there is still work to be done to include the region's women, as more than half (52%) still do not have a bank account. This figure continues to be higher than the average for women excluded worldwide (43%), in middleincome countries (47%), and significantly higher than in OECD countries (6%). In addition, the improvements in the regional average are largely due to specific advances in particular countries such as Brazil, Costa Rica, Jamaica, Mexico and the Dominican Republic, which saw increases in the number of women included and a narrowing of the gap. Countries like Chile, El Salvador and Uruguay considerably improved the proportion of women included, but at the same time show an

increase in the gender gap, which suggests that the intensive processes of inclusion are not always equitable.

However only 11.4% of women in LAC save in a financial institution; that is, less than half the world average (25%) for middle-income countries (22%), and far below the average for OECD countries (50.4%).

Are there any countries that are doing particularly well in terms of female inclusion and which could serve as an example for the rest?

Brazil, Costa Rica, Jamaica, Mexico and the Dominican Republic, which saw advances in both the number of women included and a narrowing of the gap. According to the report

WEVentureScope by the FOMIN and Economist Intelligence Unit, Chile ranks first in the region for its support for women's entrepreneurial initiatives, followed by Peru, Colombia and Mexico. Chile heads the general ranking with low macroeconomic risk, particularly strong initiatives for diversity of providers and solid social services.

Peru comes just below Chile thanks to its strong business networks, technical support programs for SMEs and its stable macroeconomic environment.

Colombia comes in third: it has well-developed training programs for SMEs and offers ample access to university education for women.

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What can be done to reduce the financial gap for womenowned SMEs in Latin America and the Caribbean?

In the future, both public programs and policies and products should be designed to adapt to women, by taking into account their specific preferences and restrictions.

However, there is a systematic lack of gender-disaggregated data in the public and private sector on both the demand side (data from users of household or special surveys) and on the supply side (data from banks). This dearth of information makes it difficult to reach a satisfactory diagnosis, and to design policies and assess public interventions.

In the private sector, the business case for investing in women-owned SMEs should be promoted more intensively. Organizations such as the IDB, FOMIN and Global Banking Alliance for Women (GBA) are spearheading this effort.

Academic studies have shown that providing women with access to capital, savings accounts, training in business management, professional training and employment receipts helps raise the productivity and income of self-employed women workers. The private sector will certainly play an important role in narrowing the gap, and the IDB

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helps banks in Latin America and the Caribbean through its women entrepreneurship Banking initiative (weB) to implement funding models that support the growth of businesses owned by women. The aim is to incentivize banks and other financial institutions to testdrive innovative and inclusive funding products and services. Until June 2015, the IDB –through weB– has approved 14 projects, which are expected to benefit approximately 100,000 micro, small and mediumsized enterprises through to 2019.

What are the main problems facing the population in Latin America?

The slowdown in economic growth and the diminished hope of a substantial upturn pose a challenge for the LAC region, exemplified by a "new normality" featuring stagnant growth rates and less room to maneuver to bring the situation to an end.

Experts and policy designers are concerned that these more limited outlooks may jeopardize the social advances of the last decade and push the Latin American economies towards the so-called middle-income trap –a situation where a country's development prospects become bogged down.

In the last ten years, Latin America has succeeded in lifting over 70 million people out of poverty; meanwhile its middle classes have expanded until they now represent over 50% of the population. Education, infrastructure, security and better quality healthcare services now form the core demands of the region's growing middle classes. While it works to meet these new expectations, the region is in turn facing the challenge of having a large part of its population living in a situation of “chronic poverty” – 130 million people, according to a recent study.

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The economic growth of LAC could recover slightly to 2.2% in 2015, compared to 1.3% in 2014, the lowest rate since the global financial crisis. In the words of Luis Alberto Moreno, chairman of the IDB, Latin American and Caribbean countries should prioritize reforms that ensure sustained and inclusive growth in the medium and long term. “The answer today, more than ever before, lies in internal order growth sources”, he says.

“Here the overriding challenge is to increase productivity".

This is the factor that explains our relative backwardness compared to other parts of the world”.

05

Banking penetration in Africa driven by mobile devices

64 million people hold mobile money accounts in Sub-Saharan Africa. Beyond the M-Pesa app, which has been such a huge success in Kenya, here we examine some of the other startups that are thriving in Africa.

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In the year 2030 two billion people will use their cell phones to save, lend and make payments, according to Bill Gates. But you don't need to peer that far into the future to recognize the potential that mobile banking offers as a driver of financial inclusion.

In Ivory Coast, Somalia, Tanzania, Uganda and Zimbabwe more adults have mobile money accounts than bank accounts. In Tanzania nearly a quarter of individuals who collect payments for agricultural products do so with their cell phones in hand.

Figures from the World Bank demonstrate just how vital mobile devices are for the unbanked population: in Sub-Saharan Africa 12% of adults (64 million people) have mobile money accounts, 10% more than in the rest of the world (2%).

More figures: 48% of adults in Sub-Saharan Africa send or receive remittances. In the wake of MPesa's success in Kenya, plenty of startups are emerging with the intent to provide financial services to the 75% of the African population that is excluded from traditional banking.

Kenya leads the way, with mobile money account ownership at 58%, while Tanzania and Uganda have rates of close to 35%. In Kenya more than half of adults who pay utility bills use a cell phone to do so. One success story that corroborates this trend is that of the M-Pesa app.

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Afrimarket: a “cash-to-goods” transfer service that is breaking Western Union's monopoly.

In March of 2013 the Moroccan entrepreneur Rania Belkahia partnered with Jérémy Stoss and François Sevaistre to launch this startup, which aims to compete with the giant names dominating the remittance business. Every year emigrants send 60 billion dollars to Africa. However, just 5% of Africans hold bank accounts, which means this money is either moved by "informal" means or via the two major players in money transfers: Western Union and MoneyGram, which together account for 75% of the market.

As Belkahia explained to La Tribune, “on average a fee of 12.5% of each transfer amount is charged, plus a commission on the exchange rate. We provide a cheaper alternative that also guarantees that the funds will be put to good use."

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Afrimarket puts the person making the transfer in control of how the money is spent. They can specify whether it can be used to buy food, make payments on a home, education, domestic appliances, etc. An SMS is sent to the beneficiary detailing how much they have to spend on items via a catalog or at any of the 300 partner establishments, which are equipped with Afrimarket mobile payment terminals.

"Beneficiaries simply waive their cell phone close to the terminal to authenticate the transaction: we use encrypted sound technology that works with all operators and devices. Including the 10 euro Chinese cell phones that are so widely used in Africa," says Belkahia. Orange has invested in the business, which operates in Abidjan, Dakar, Lomé, Cotonou and Bamako.

Bouquet Pass Santé in Senegal: paying medical bills from abroad.

Bouquet Pass Santé is a startup from Senegalese entrepreneur Moussa Traoré, which allows money to be made available to cover medical emergencies and healthcare bills. The process is simple: if, for example, someone falls ill in Dakar, a relative living in Spain could use the Bouquet Pass

Nigeria: Simple Pay. Uber and the travel agency Jovago have created an app that supports secure and instant direct payments, competing with PayPal.

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Santé website to select a doctor for them. The relative makes the payment online and the patient is sent a message with a code detailing their appointment. In Senegal around 80% of remittances are used to buy food, while just 4% is spent on health.

Bitcoin in Ghana.

The Bean app is designed to do away with commissions. It therefore uses bitcoins instead of the local currency. Nikunj Handa says in this report carried by Le Monde, “the aim is to attract a significant share of remittance flows. We are focusing on Ghana and Nigeria. By using bitcoins, transfer costs are reduced from the 12% charged by traditional operators to 3% with Beam. We are far more competitive. Of the 60 billion dollars that are sent to Africa, 7 billion goes toward transfer costs.“ Beam converts its customers' money into bitcoins, which can then be changed into Ghanaian cedis via the recipient's mobile device.

SnapScan: South Africa's Apple Pay SnapScan provides contractfree payment services in Cape Town, Durban and Pretoria, just as Apple Pay does in the United States. The process is as follows: once the SnapScan app has been downloaded, the user takes a photo of a product's QR code and enters a 4 digit code to confirm the purchase. SnapScan provides contract-free payment services in Cape Town, Durban and

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Pretoria, just as Apple Pay does in the United States. The process is as follows: once the SnapScan app has been downloaded, the user takes a photo of a product's QR code and enters a 4 digit code to confirm the purchase. By 2017 350 million Africans will own cell phones. These startups have a huge market open to them.

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